Corporate Finance — DU Bachelor of Business Administration (Financial Investment Analysis) Previous Year Question Papers

6. (a) X Ltd is considering relaxing its present credit policy and is in the process of evaluating two alternative policies. The firm is required to give a return of 25% on the investment in new accounts receivable. The company's variable cost is 40% of the sale. The other relevant information is given below. Which policy option is best for the company? Particulars Present Policy Policy option-1 Policy option-2 Accounts receivable turnover ratio 4 3 2.4 Bad debt losses 1% 2% 3.% (b) A project requiring a Rs.5 Crore investment has a profitability index of 0.94. What is its net present value? (6) 5. Show your working clearly on the answer sheet. 1. (a) XYZ Ltd. is considering the replacement of one of its moulding machines. The existing machine is in a good operating condition, but is smaller than required if the company is to expand its operation. It is 4 years old, has a current salvage value of Rs. 4,00,000 and a remaining life is 6 years. The machine was initially purchased for Rs. 20,00,000 and is being depreciated at 25% on the WDV basis. The new Machine will cost Rs. 30,00,000 and will be subject to the same method as well as the same rate of depreciation. it is expected to have the useful life of 6 years. The management anticipates that with the expanded operations there will be a need of an additional net working capital of Rs. 2,00,000. The new machine will allow the company to expand the current operations and thereby increase annual revenue by Rs. 10,00,000. Variable cost will be 30% of sale. Fixed cost is likely to remain same. The corporate tax rate is 35%. Its cost of capital is 10%. The company has several machines in the block of 25% depreciation. Should the company replace the existing machine? What course of action will you suggest if the new machine has zero salvage value at the sixth year end. (12) (v) Credit allowed by suppliers 3.5 weeks (vi) Time lag in payments of labour 2 weeks (vii) Time lag in payments of factory overheads 1.5 weeks (viii) Company sells, 25% of the output against cash (ix) Cash in hand and bank is desired to be maintained Rs. 2,25,000 (x) Safety margin of 15% is required to be maintained You may assume that production is carried on evenly throughout the year and labour and factory overheads accrue similarly. You are required to prepare a statement showing estimate of working capital needed to finance a budgeted activity level of Rs. 1,04,000 units production. Finished stock, receivables and overhead are taken at cash cost. (12) (b) Investment, Financing and Dividend decisions are all interrelated. Comment. (6) 5. (a) XYZ Ltd. has furnished the following cost sheet : Rs. Per unit Raw material 98 Direct Labour 53 Factory overhead (includes depreciation of Rs. 15 per unit at budgeted level of activity) 88 Total cost 239 Selling price 282 Additional information : (i) Average raw material in stock 3 weeks (i) Average work in progress (% of completion with respect to material-75% Labour & overhead-70%) 2 weeks